When purchasing or renewing your property insurance, it’s vital for you to ensure such cover includes correct property rebuilding sum insured. Doing so can make all the difference in providing sufficient protection and preventing the application of average clauses should a claim occur (reduction in claims payments due to underinsurance).
You may have inaccurate rebuilding cost sums insured for a wide range of reason, whether it stems from leveraging property market valuation, unintentionally underestimating rebuild costs by say, being impacted by factors outside of your control (e.g., inflation). Regardless, such inaccuracies are all too common. In fact, an estimated 80% of UK properties are underinsured, according to Rebuild Cost Assessment Ltd. This equates to around 587,00 properties – with a total value of £340 billion – without adequate buildings insurance.
With these findings in mind, it’s evident that property owners need to take property rebuilding valuations seriously. This article offers more details on insurance to value (ITV), outlines factors to consider when determining a property’s value, explains the pitfalls of property undervaluation and provides best practices for improving property valuation measures.
Factors Impacting Property Value
You should consider the following factors to determine correct property valuations:
- Direct and indirect expenses: In addition to direct costs, such as material and labour expenses, property valuations should incorporate indirect costs, such as consulting fees, engineering services and other expenses not directly associated with rebuilding.
- Property age: In the case of older structures, property valuations should include additional construction costs that may arise from upgrading outdated building materials and equipment.
- Building regulations: Older properties may also require certain modifications amid the rebuilding process to comply with modern building regulations (e.g., plumbing improvements, energy efficiency upgrades and safety enhancements). These adjustments may further compound construction costs, driving up property valuations.
- Property accessibility: Properties situated at steep locations or adjacent to neighbouring structures may need to have scaffolding or other safety measures put in place during demolition and rebuilding operations to ensure accessibility. These measures should also be factored into property valuations.
- Unique features: Some custom property elements (e.g., stained glass) could necessitate specialised construction work, elevating rebuilding costs. Therefore, it’s crucial for these unique features to be incorporated into property valuations.
Consequences of Property Undervaluation
You could face a number of ramifications if you conduct inaccurate ITV calculations and undervalue your property. Primarily, you may lack sufficient cover following property losses, forcing you to pay a proportion of the loss yourself to fully rebuild. This is because property undervaluation can sometimes result in penalties under insurance contracts, called average clauses. This means that proportionately, any claim could be reduced by the amount that the property is underinsured.
Depending on the severity of property losses and associated rebuilding operations, paying these costs out of pocket could lead to major financial setbacks and for businesses operating in certain scenarios, possibly even bankruptcy.
Ways to Achieve Property Rebuilding Cost Assessments
Here are some additional best practices to help ensure accurate rebuilding cost calculations:
- Find a reputable valuer. Third-party chartered surveyors are considered the gold standard in property valuations by insurers, as they offer reassurance that calculations were conducted by experienced and objective professionals. As such, it’s vital to secure a trusted and reputable surveyor.
- Consult other parties. Determining the value of a property should be a team effort. Make sure to compile a variety of property data from multiple qualified parties (e.g., accountants, contractors, estate agent professionals, risk managers, insurance professionals and chief financial officers) when making valuation decisions.
- Make updates as needed. The value of a property is always changing. This means it’s imperative to update property rebuilding cost assessments on a regular basis. For instance, assessments should be conducted at least every three to five years. Take note that property valuations may need to occur even more often.The frequency will depend on factors such as changing property exposures, altered operations, building upgrades or modifications, the implementation of new technology or equipment on-site, shifting market conditions and property construction trends (e.g., inflated labour and material costs). It’s best to work closely with trusted insurance professionals when updating property rebuild cost assessments to maintain ample cover and avoid average clause penalties being applied at the time of a claim.
RS Risk Solutions work with Rebuild Cost Assessment Limited. Through our association, we can obtain discounted options for our clients. RCA Ltd provides cost effective solutions to obtain up-to-date property rebuild assessments: RebuildCostASSESSMENT.com. Please contact us for more information about the issues of underinsurance and property rebuild valuations.
Legal Specific Disclaimer:
The following information is not exhaustive, nor does it apply to specific circumstances. The content therefore should not be regarded as constituting legal or regulatory advice and not be relied upon as such. Readers should contact a legal or regulatory professional for appropriate advice. Further, the law may have changed since the first publication of this information.
The content of this Cover Overview is of general interest and is not intended to apply to specific circumstances. It does not purport to be a comprehensive analysis of all matters relevant to its subject matter. The content should not, therefore, be regarded as constituting legal advice and not be relied upon as such. In relation to any particular problem which they may have, readers are advised to seek specific advice. Further, the law may have changed since first publication and the reader is cautioned accordingly. © 2022 Zywave, Inc. All rights reserved.
